We will begin this article by reiterating how important the textile sector is for India.
More than 60 % of India’s population is engaged in agriculture and they contribute to just about 15 % of India’s GDP. It indicates that to alleviate poverty, we’ll have to initiate reforms in the agricultural sector and simultaneously encourage people to move away from agriculture to industry.
We’ll have to create job opportunities in the manufacturing sector to absorb surplus labour from agriculture.
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Textile is a major sector that can contribute significantly to employment generation as it is labor-intensive. Consider this comparison between Reliance Industries and Shahi exports (India’s largest apparel exporter).
The RIL reports $110 billion in assets and 250,000 employees across its various ventures. Therefore, it employs five workers for each $2.2 million in assets. Shahi Exports..has assets worth $185 million and employs 106,000 workers in its apparel factories. Therefore, it employs 1,260 workers for every $2.2 million in assets. For the same investment, Shahi Exports creates 252 times the jobs that RIL does.
India’s textile sector is one of the oldest industries in India. It is the second-largest employment provider, after the agricultural sector. It provides employment to 450 lakhs people. It contributes 2.3 % to India’s GDP, 13 % to industrial production, and accounts for 12 % of export earnings. (1)
Moreover, India has an advantage in terms of the availability of raw materials. India is the world’s largest producer of jute and cotton, and the second-largest producer of synthetic fibers.
In spite of this, India is only the fifth largest exporter of textile and apparel globally, after China, Germany, Bangladesh, and Vietnam (This is the data as per the year 2018). India’s textile industry has a huge potential for growth.
We can increase our share in the world market as China’s export is gradually decreasing due to higher wages. And, the trade war between the US and China and the global supply chain disruptions in the aftermath of COVID-19 has further accelerated this trend.
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But, India has been facing stiff competition from Vietnam and Bangladesh.
If we look at just exports of clothing/ apparel, Bangladesh’s exports are more than twice that of India.
In 2000, India enjoyed 3 % of the global market share compared with Bangladesh’s 2.6 %. Since then, Dhaka has more than doubled its share in the world market, while India has gone up by only 1.1 percentage points.
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Why India lost out to Vietnam and Bangladesh?
The first step to overhaul a sector is to recognize where we are lacking. There are several reasons as to why exports from India are less competitive as compared to Vietnam and Bangladesh:
- Labour market rigidities: India’s labour market is very inflexible. It is difficult to lay-off workers. It hits the garment manufacturing particularly hard, as the work is seasonal in nature and the orders are prone to fluctuations. Further, these laws restrict the growth of small-sized textile firms. The firms are disincentivised to increase the scale of their operations so as to not come under the ambit of convoluted and often overriding labour laws. For instance, an average textile firm in India has about 240 employees, while in Bangladesh, garment factories boast an average of 797 employees per enterprise (implying rigid labour laws ultimately hinders job creation). Labour market laws are more flexible in Vietnam and Bangladesh. To give an example, labour laws in Bangladesh require at least 30 % of the labour force to consent before beginning a trade union. It reduces the possibility of strikes. While in India, in 2015, around 600 textile mills were shut down in India due to financial problems created by strikes/labour problems, lock-outs, etc. [You may also read- Why are labour law reforms required in India?]
- Cheaper labour: Labour in India is relatively more expensive. An Indian garment worker earns $257 per month, while a Bangladeshi worker gets only $101. And, the monthly wage of a worker in Vietnam is $216. Moreover, the productivity of a Bangladeshi worker is better than that of his Indian counterpart. (2)
- Small firm size– India had reserved apparel production for the small size sector. Although this reservation was withdrawn, the textile sector continues to be dominated by small firm size. Small-sized firms cannot realise the advantages of economies of large scale operations and it leads to a higher cost of production. India has to remove disincentives like rigid labour laws that hinder an increase in the scale of operations.
- Lack of infrastructure: It is very crucial in the textile sector for the orders to be delivered on time. Infrastructural deficiencies and excessive paperwork at ports in India lead to a delay in the transportation time of both raw materials and output and also increases costs. In contrast, Bangladeshi firms are usually located in a port city, while Vietnam has invested a huge amount in infrastructure development. Also, an electronics industry estimate shows that logistics, taxes, infrastructure, and land costs are about 12 to 18 % higher in India compared with China and Vietnam.
- No free trade agreement with Europe– Bangladesh, and Vietnam gets duty-free access to the European markets, while India has to pay 9-10 % duty on exports. This is because Bangladesh is a least developed country (LDC) and is given preferential treatment by developed countries. And, Vietnam has a free trade pact with the European Union. India should expeditiously sign a free trade agreement (FTA) with Europe to ensure a level playing field with the competitors.
- Exchange-rate of Rupee: Overvalued rupee affects the competitiveness of the textile sector as exports become more expensive. To add to that, Bangladeshi Taka is weaker than Indian rupee making its exports cheaper. Also, Vietnamese dong has been pegged to the US dollar, making the exchange rate more stable in comparison to India.
To add to the above, there has been a general trend of companies looking to shift their operations from China, to relocate to Vietnam due to many enabling factors.
Apart from factors such as close proximity to China and cultural similarities, Vietnam is way ahead of India in terms of infrastructure development. It has also invested a huge amount in healthcare and education necessary for building human capital. Lastly, like China, Vietnam has also planned its manufacturing hub (Ho Chi Minh city) in a way that factories and suppliers are located close to each other. It cuts costs and saves time.
India has to take a leaf out of their books.
To conclude, the recent coronavirus pandemic has provided an unprecedented opportunity for India to attract firms that want to shift their base from China. We have to address these challenges, which will benefit not just textile, but also other sectors.
[You may also read: Companies to move manufacturing out of India: Will India benefit?]
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